ACA Lookback Measurement Method: How to Determine Full-Time Employees for ACA Compliance

Key takeaways

This measurement method is one of two methods that employers can use to determine full-time employees as defined by the ACA and, therefore, should be offered health insurance coverage.
If the employee's average hours per week are 30 or higher, that employee is considered full-time for purposes of the ACA (regardless of HR full- or part-time status).
The eligibility status that is determined from the ACA lookback measurement method is then valid for the duration of a corresponding "stability period."
Using the ACA lookback measurement method gives employers a practical method to be proactive in their approach when seeking to make compliant offers of health insurance coverage, along with completing accurate reporting to the IRS.

When it comes to the Affordable Care Act (ACA), one question that comes to mind is "Who is all the fuss about?" Full-time employees is the quick answer. But what is the definition of a full-time employee? (The answer, while seemingly simple, may not be as straightforward as you think.) The ACA lookback measurement method is a "measurement" tool and one of the ways to answer that question with the goal of maintaining compliance.

What is the ACA lookback measurement method?

This measurement method is one of two methods that employers can use to determine full-time employees as defined by the ACA and, therefore, should be offered health insurance coverage. Under this method, also known as the ACA lookback measurement method, an employee's hours of service are tracked and measured during a predefined period to calculate the average hours they worked per week during that time frame. The predefined period is known as the "measurement period," or ACA lookback period. If the employee's average hours per week are 30 or higher, that employee is considered full-time for purposes of the ACA (regardless of HR full- or part-time status). The eligibility status that is determined from the ACA lookback measurement method is then valid for the duration of a corresponding "stability period." The stability period is a set period of time following the measurement period during which an employee’s full-time or non-full-time status is “locked in” regardless of the employee’s actual hours during the stability period

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How long is the stability period?

The stability period length is set by the employer, but it must follow ACA rules. It must be at least 6 months and no shorter than the measurement period. In practice, many employers choose a 12-month stability period, so it aligns with a 12-month measurement period and simplifies administration. A simple way to think about it is this: If your measurement period is 12 months, your stability period is typically also 12 months. Whatever status is determined during the measurement period is then locked in for the entire stability period. This is why coverage generally cannot be removed early without potential penalty risk, even if the employee’s hours drop.

What is the difference between the initial measurement period and the standard ongoing measurement period?

The initial measurement period is used to determine if new-hires who might work a variable schedule are full-time employees. Once employees complete their initial measurement period, they will transition to being measured each year in the standard ongoing measurement period with the remainder of the ongoing employee population. Ongoing employees are measured using the standard measurement period each year, employers are permitted to choose the months when the standard measurement period starts and ends, such as a calendar year, making the process as administratively simple as possible.

Should an employer still measure a newly hired employee's hours if it's expected that they will work over 30 hours per week?

If employers don't need to determine if an employee is full-time after hiring them, the rules of applying the ACA lookback measurement method are a little different. For new hires who are reasonably expected to work 30 hours per week when hired, an offer of health insurance coverage should be made by the first day of the fourth full month of employment. The period before the offer of coverage must be made is known as the "limited non-assessment period," appropriately named since the IRS will not assess a penalty during this time if a timely offer of coverage is made on or before the end of that period. While there is no initial measurement period for employees in this scenario, they should still be measured each year during the standard measurement period.

What are the benefits for employers using the ACA lookback measurement method to determine eligibility?

Proactive compliance: Helps employers make compliant health coverage offers and support accurate IRS reporting
Clear eligibility rules: Uses average weekly hours during the measurement period to determine who qualifies as full-time
More time to act: Gives employers up to 90 days in the administrative period to review eligibility and make timely offers
Better reporting accuracy: Supports more accurate IRS Forms 1095-C reporting and can help reduce penalty risk

What happens if an employer decides to remove an employee's health insurance coverage during a stability period?

Removing health insurance coverage during the stability period from employees who were determined to be full-time would result in potential penalty risk to the employer for not fulfilling the requirements of the ACA employer mandate. This could lead to IRS penalties, reporting discrepancies, financial exposure and compliance risk for the employer.

Will the IRS assess an employer penalty if health insurance coverage is removed from an employee who switches from a full-time position to a part-time position?

There is a special rule associated with employees who change employment status mid-stability period. The IRS may, however, assess a penalty if an employer removes health insurance coverage from an employee who was determined to be full-time under the ACA lookback measurement method before the end of the stability period, even if that employee later moves to a part-time position if the special rule is not followed..

Because ACA full-time status does not always align with an organization’s internal full- or part-time designations, an employee who moves to a part-time role may still remain eligible for coverage. Removing coverage during the stability period can expose the employer to potential ACA employer mandate penalties.

Next steps for your ACA strategy

So now that you have a basic understanding of using the ACA lookback measurement method, you are empowered within your organization to improve your ACA strategy.

Here are some questions to ask yourself as you navigate the complexities involved in managing ACA reporting requirements:

1. Do you have the time to dedicate to all the potential components of ACA compliance?

2. Who are your trusted experts?

3. Do you have a way to get insight as it relates to ACA compliance?

4. Have you thought about working with a partner to help you take a proactive approach to penalty avoidance?